Tencent: China’s unstoppable Internet powerhouse

Tencent, in which South Africa’s Naspers holds a 33% stake, rose to a record high after posting accelerated sales growth and topping the most optimistic of analyst estimates.

The shares climbed 2.3% to a lifetime closing peak of HK$391.80 in Hong Kong, valuing the company at more than $477bn (R6.8 trillion at the time of writing).

The owner of WeChat, the social network that is nearly ubiquitous in China, reported a 61% rise in third quarter sales on Wednesday. Fuelled by advertising and hit game Honour of Kings, the growth was the fastest since 2010, when revenue was a mere one-fourteenth of its current level.

Mobile games growth is strong and the company is hitting pay dirt in areas of payments, cloud and on-demand video subscription

By getting WeChat onto almost a billion smartphones in China, Tencent has leveraged the instant messaging service into an entertainment and gaming platform that is driving advertising sales. Although the Shenzhen-based company remains largely absent overseas, it’s built a 12% stake in Snapchat-owner Snap and is exploring new sources of growth in the cloud, financial services, movies and music.

“We don’t see any signs of slowdown or deterioration for next quarter or 2018,” said Naoshi Nema, an analyst at Cantor Fitzgerald in Hong Kong. “Mobile games growth is strong and the company is hitting pay dirt in areas of payments, cloud and on-demand video subscription.”

Sales for the quarter were 65.2bn yuan ($9.8bn), compared to analyst expectations for 61bn yuan. Net income surged 69% to 18bn yuan, also blowing past projections for 15.8bn yuan.

WeChat had 980m monthly active users, up almost 16% from the previous year and now sending 38bn messages daily. But the mobile version of QQ, Tencent’s other mainstay social network, had 2.5% fewer users at the end of the quarter.

Honour of Kings

The success of Honour of Kings helped expand smartphone gaming revenue by 84% in the period. While the game was recently dethroned from the top of China’s iOS store, Tencent has a full pipeline of titles for 2018 that includes several from South Korean developers that were held back amid political tensions with China.

The company’s first two survival games, Glorious Mission and Crossfire, have each had more than 20m pre-registrations with the Deserted Island title to launch this month.

“Games will be still be a key revenue contributor going forward,” said Benjamin Wu, an analyst at Shanghai-based consultancy Pacific Epoch. “Its key title Honour of Kings is looking to sustain its gross revenue to the next year.”

Tencent’s Chinese headquarters

Investors bet earlier in 2017 that some of the company’s boldest investments would finally pan out, adding about $230bn of market value and creating one of the world’s most richly valued companies.

A still-nascent advertising and finance business on WeChat has also expanded at a rapid clip, furthering its ambition of eventually becoming an powerhouse along the lines of Alibaba Group or Facebook. Online advertising sales grew 48% in the quarter.

For the longer term, it’s investing billions of dollars in artificial intelligence research, both to better target marketing as well as underpin future product categories. Tencent is said to have developed an autonomous driving system, among other areas it’s delving into.

As Tencent takes more steps toward creating a more global business, its financial muscle is helping it withstand domestic competition

As Tencent takes more steps toward creating a more global business, its financial muscle is helping it withstand domestic competition from the likes of Jinri Toutiao and help it retain pole position in Chinese gaming and social media. It’s also plowing money into music, e-books and video streaming — the content it needs to keep users hooked on its WeChat social media and messaging service.

While it’s unclear what it plans with its chunk of Snap, the acquisition comes after a failed attempt to pick up WhatsApp and may mark a renewed effort to feel out markets beyond its home turf. Tencent has said the pair will share experiences and expertise in social networking, and cooperate on game distribution.

“Over time, we’ll see whether we can do something more strategic with them,” president Martin Lau said in a conference call.

On the deals front, the stellar debut of e-books unit China Literature may not immediately presage more mega spinoffs. While Tencent is said to be prepping its music arm for a listing that could raise at least $1bn next year, Lau sees value in keeping many of the businesses integrated with the company.

“I don’t think spinoffs are going to be a norm for us going forward,” Lau said. — Reported by Lulu Yilun Chen, with assistance from David Ramli, (c) 2017 Bloomberg LP